Taxation of foreign assets
According to an EC release (IP/12/1147), UK law provides different tax treatment of domestic and cross-border transactions, as follows:
- If a UK resident invests capital in a UK company, the company will be taxable on the income generated, but the investor will not be taxed until the company makes a distribution (e.g., a dividend).
- However, if a UK resident invests capital in a company in another EU Member State, the company is subject to tax in that Member State on the income it generates. In this scenario, the investor would be subject to UK income tax on that income, even though the income has not been distributed.
According to today’s EC release, this treatment poses a restriction of the freedom of establishment and the free movement of capital—one that is contrary to EU rules. Thus, the issue is referred to the CJEU, as the last step in the infringement procedure.
Taxation of capital gains
According to a separate EC release (IP/12/1146), a provision of UK tax law provides that a parent company in the United Kingdom is taxed for the capital gains of its subsidiaries in other EU Member States, but no similar taxation exists when subsidiaries are located in the United Kingdom.
Thus, if a UK resident company acquires more than a 10% stake in a company resident in another EU Member State and that foreign company disposes of an asset and realizes a capital gain, this gain may be taxable in the EU Member State where the company is resident. However, this gain will also be immediately attributed to the UK company and therefore be subject to UK corporation tax. The UK company cannot avoid this tax liability—even if it proves that the relevant transactions were carried out for valid commercial reasons and lacked any tax avoidance purpose.
If, however, a UK resident company has a similar stake in another UK resident company which, in turn, realizes a gain on the disposal of an asset, the company disposing of the asset would be subject to UK corporation tax, but would not be liable to any tax in the United Kingdom on this gain.
The EC found that this treatment is contrary to EU law, and thus referred the matter to the CJEU as the last step in the infringement procedure.
For background, see TaxNewsFlash-Europe: United Kingdom - Major UK Tax Structural Changes Ahead?